Buying a business or just a group of assets?
How a client decides whether IFRS 3 applies to a purchase of operations or whether it bought only a group of assets, and why the label changes the figures.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A client buys the operations of a competitor that is closing down: the delivery vehicles, the stock, the customer list, the lease on the depot, and most of the drivers, who move across on the same terms. Another client buys a building with a single tenant from a property company. Both sale agreements talk about "the business". Only one of these deals may be a business for accounting purposes.
The label matters. If IFRS 3 applies, the client measures what it bought under the standard's rules, recognises goodwill or a bargain purchase gain, and gives the business combination disclosures. If it bought only a group of assets, none of that happens.
Why the label matters
IFRS 3 establishes principles and requirements for how an acquirer in a business combination recognises and measures the assets and liabilities acquired, and any interest in the acquiree held by other parties. It also establishes how the acquirer recognises and measures goodwill, or a gain from a bargain purchase.
Under IFRS 3, where the acquired assets and liabilities exceed the consideration paid, the excess is a bargain purchase and is recognised in profit or loss immediately.
Those outcomes belong to business combinations. A purchase of assets that do not form a business is accounted for item by item. The difference shows up in the statements:
| Question | Business combination | Group of assets |
|---|---|---|
| Goodwill | Recognised under IFRS 3 | None |
| Bargain purchase gain | In profit or loss immediately | Not applicable |
| Measurement | IFRS 3's rules for what was acquired | The price spread across the items bought |
| Disclosure | Business combination notes | The normal notes for each asset |
The 2018 narrower definition and the simplified assessment
The IASB issued Definition of a Business (Amendments to IFRS 3) in October 2018. The IFRS Foundation states that the amendments narrowed and clarified the definition of a business, and permit a simplified assessment of whether an acquired set of activities and assets is a group of assets rather than a business.
With the client, work through questions such as:
- What exactly was acquired? Assets alone, or assets together with processes, such as staff with know-how, systems and contracts, that work on them?
- Could the acquired set produce outputs? A depot with vehicles and drivers who serve customers is close to a working operation. A building with one tenant is closer to a single asset.
- Does the simplified assessment settle it? Read the simplified assessment the 2018 amendments allow. Where it applies, it can conclude quickly that the purchase is a group of assets.
Record the reasoning, not just the answer. A reviewer will want to see which facts pushed the conclusion one way or the other, and why.
Goodwill and bargain purchases
Where IFRS 3 applies, goodwill or a bargain purchase gain is measured as the standard requires. In a small-company deal, an apparent bargain purchase is more often a sign of a measurement mistake than of a bargain: liabilities missed, assets valued too generously, or a seller under pressure whose position nobody looked at closely. Recheck the identification and valuation of everything acquired before recognising a gain in profit or loss.
A group of assets: spreading the price instead
Where the client bought a group of assets, there is no goodwill and no bargain purchase gain under IFRS 3. The purchase price is spread across the individual assets and liabilities acquired, normally by reference to their fair values at the purchase date, and each item then follows its own standard: vehicles under IAS 16, stock under the inventory rules, a lease under IFRS 16.
The allocation should be documented as carefully as a business combination calculation would be. It decides future depreciation charges and, often, future tax deductions.
What Achekam does not do
Achekam has no engine that consolidates the accounts of a group of businesses. If the client bought shares and is now a parent, the consolidation working has to be prepared outside Achekam, a situation explained in consolidated statements without an engine. Whether consolidation is required at all is covered in when a parent must consolidate.
For the acquirer's own statements, the Studio's standard policy wording is based on IFRS for SMEs and labelled for review before issue, and staff can write their own policies. A full IFRS client with a business combination will usually need its own wording on goodwill and acquisitions. Notes take their figures from the mapped trial balance, and details of the acquisition the trial balance cannot hold, such as the date, what was acquired, the consideration and the fair values, are left as "[to be completed]".
A short decision record
For each acquisition, the file should hold:
- The sale agreement and a list of what actually passed to the client.
- The analysis of whether the acquired set is a business, including the simplified assessment where it was used.
- The conclusion, who reached it and who reviewed it.
- For a business combination, the measurement of assets, liabilities and goodwill or bargain purchase.
- For an asset purchase, the allocation of the price across the items.
The IFRS Foundation's IFRS 3 summary explains how an acquirer recognises the assets and liabilities it acquires, measures goodwill or a bargain-purchase gain, and discloses the combination.
Getting the label right first saves rework later. Once a business combination has been recorded, with goodwill and its disclosures, unwinding it because the purchase was really a group of assets is far harder than asking the question at the start.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
